Dept of Self-Promotion

02/27/2020

An autobiographical Twitter thread

All about me:

Posted at 02:38 PM in Dept of Self-Promotion | | Comments (0)

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02/08/2020

Yours truly cited by Delaware Chancery Court in the Panera Bread Company Appraisal case

From Vice Chancellor Zurn's opinion:

The board of directors “has the sole power to negotiate the terms on which the merger will take place and to arrive at a definitive merger agreement embodying its decisions as to those matters.”434

434 Stephen M. Bainbridge, Mergers and Acquisitions 56 (2d ed. 2009) (citing 8 Del. C. § 251(b)); accord 8 Del. C. § 141 (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors ....”).

IN RE APPRAISAL OF PANERA BREAD COMPANY, CV 2017-0593-MTZ, 2020 WL 506684, at *25 (Del. Ch. Jan. 31, 2020).

The preponderance of the evidence shows that the board directed Shaich’s negotiations and “arrive[d] at a definitive merger agreement embodying its decisions as to th[ose] matters.”463

463 Bainbridge, supra note 434, at 56.

Id. at *26.

 

Posted at 04:08 PM in Dept of Self-Promotion, Mergers and Takeovers | | Comments (0)

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01/02/2020

Tweeting the #AALS2020 Business Associations Section Panel on Corporate Purpose

Posted at 02:40 PM in Corporate Social Responsibility, Dept of Self-Promotion | | Comments (0)

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Remarks on Corporate Purpose for AALS 2020 Panel on Rising Tensions Among Corporate Stakeholders

We are convened to discuss “Rising Tensions Among Corporate Stakeholders.” Really?

I see something very different happening. The corporate social responsibility debate continues, but some key players have switched sides.

Investors—including the big three of Blackrock, Vanguard, and State Street—increasingly at least purport to care about ESG issues.

And this fall, The Business Roundtable—a center of corporate C-suite elitism—purportedly switched sides, as well.

What’s going on?

As we all know, a couple of months ago, the BRT released a statement on the purpose of the corporation in which it made a major break from its longstanding position. Starting in 1997, the BRT had issued a series of statements positing that corporations exist principally to serve their shareholders. In its recent statement, however, the BRT announced that going forward its members would recognize that “we share a fundamental commitment to all of our stakeholders.” The 181 signing CEOs committed themselves to leading “their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders.”

The BRT statement was met with enthusiastic praise in some quarters, condemnation in others, and skepticism in still others. Much of the commentary, however, failed to correctly assess either the effect of the statement or the reasons the BRT felt moved to issue it.

In most cases, the BRT statement likely will prove no more than an irrelevant and innocuous platitude, which may make some people feel a bit better about the role big corporations play in our lives, but which will not affect corporate decision making. Most business decisions, after all, do not directly oppose the interests of stakeholders and shareholders. To the contrary, most business decisions are potentially win-win scenarios. The proverbial rising tide usually does lift all boats.

This is true even of decisions that in the short-run seem to favor stakeholders at the expense of shareholders. Providing health benefits for employees may increase expenses and reduce profits in the short term, for example, but often leads to greater productivity in the long term. Focusing on environmental sustainability can be a useful means of engaging with customers and thereby building brand reputation. Indeed, companies such as Walmart and Coca-Cola have used sustainability in their messaging with success.

Occasionally, however, a business faces a true zero-sum decision. It cannot make both stakeholders and shareholders better off either in the short- or in the long-run. In such a case, would we really expect the signers of the BRT statement to put stakeholders interests ahead of shareholders?

Obviously, the BRT has no power to change the law and the law remains clearly contrary to the BRT’s new commitments. One hundred years ago, in Dodge v. Ford Motors, the Michigan Supreme Court held that: “A business corporation is organized and carried on primarily for the profit of the stockholders.”[1] Much more recently, in eBay v. Newmark, the Delaware Chancery Court likewise held that directors of a company incorporated in Delaware—as are most BRT companies—are obliged to “promote the value of the corporation for the benefit of its stockholders.”[2] The court therefore held that “a business strategy that openly eschews stockholder wealth maximization” was inconsistent with the directors’ fiduciary duties to the company’s shareholders.

In a 2015 Wake Forest Law Review article, former Chief Justice of the Delaware Supreme Court Leo Strine—arguably the leading corporate law jurist of our era—took what he called a “clear-eyed look at the law of corporations in Delaware,” on the basis of which he concluded “that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare.”

He therefore rejected arguments by various academics that Delaware law allowed executives and directors to make tradeoffs between shareholder and stakeholder interests, stating that “Dodge v. Ford and eBay are hornbook law.” Anyone who argues to the contrary, he said, was pretending. Let’s pause to savor that word: “pretending.”

To be sure, the business judgment rule usually insulates directors from liability for decisions that depart from a short-term focus on maximizing shareholder wealth. But the prudential judgment that courts generally should defer to board of director business decisions does not change the legal obligation of the board and in appropriate cases officers and directors can be held liable for putting stakeholder interests ahead of those of shareholders.

Whether the BRT likes it or not, its statement doesn’t change that rule.

Just as the BRT statement does not change the signers’ legal duties, it does not change the governance structures that constrain their freedom to act as they see fit.

CEOs are appointed by the board of directors. Boards of directors are elected by the shareholders. Until recent decades, of course, none of that mattered very much. Boards of directors passively rubberstamped the wishes of imperial CEOs. As a result, the predecessors of the CEOs who signed the BRT statement had broad discretion to make decisions that put the interests of stakeholders ahead of those of shareholders.

That world no longer exists. In response to new obligations imposed by state and federal laws, boards of directors have become more independent and less willing to acquiesce in a CEO’s wishes. At the same time, share ownership has shifted from individual retail investors to institutions. Some of those institutions—especially activist hedge funds and some pension funds—have made corporate governance activism a central part of their business model. Such investors are constantly on the lookout for managers who are failing to maximize shareholder value and are willing to pressure their boards for change.

Granted, governance activism by shareholders is somewhat offset by social justice activism by ESG-oriented investors. Even so, managers and boards that put stakeholder interests ahead of (or even on a par with) shareholder interests are likely to face proxy contests and other forms of activism from activist hedge funds and their allies. Managers and directors who too often shortchange shareholder value in the name of social responsibility may well find themselves on the losing end of such contests.

Given that nether the legal rules nor the governance environment in which the BRT’s members must operate were changed by the new statement, what purpose was served by issuing the statement? What are the signers up to?

  1. Some of the signatories are themselves social justice warriors. Oligarchs like Salesforce.com CEO Marc Benioff, for example, promote “social activism among American chief executives.”
  2. The BRT leaders are responding to perceived consumer and labor demand.In particular, millennials apparently prefer to work for and purchase from companies that are perceived as socially and environmentally responsible. Accordingly, there is an increasingly widely held view in the business community that to attract Millennial and Generation Z workers and customers, companies must project an image as social justice activists. Nike’s embrace of Colin Kaepernick is but the most obvious example of this phenomenon, but even such heartland companies as Walmart are embracing socially progressive stances, despite the risk of alienating their Red State customer base.
  3. The BRT may be trying to head off regulation by progressive politicians. As Wall Street Journal columnist David Benoit has observed, “Democratic presidential candidate Elizabeth Warren has argued that the primacy of shareholder returns has worsened economic inequality, enriching wealthy investors at the expense of workers.” With the mainstream of the Democratic Party seemingly moving in Warren’s direction on business and finance issues, the BRT’s members may have hoped that a voluntary—and perhaps intentionally ambiguous—embrace of corporate social responsibility platitudes would help them fend off more intrusive regulation in the event of a Democratic presidential victory in 2020.
  4. 4. The BRT may be responding to pressure from a few very powerful investors, especially the big three institutional investors. Institutional investors long have offered funds that focus on corporations perceived as socially responsible, which generally has been understood to mean companies pursuing progressive goals. As I noted at the outset, however, a growing number of major institutional investors, however, have embraced social activism in support of progressive goals with respect to all of the funds they manage. But this simply pushes the question further up the corporate finance food chain, since it fails to explain why investment fund managers like Larry Fink are pursuing that agenda.
  5. Some BRT members may crave a return to the days of imperial CEOS. This is the flip side of #3. Aside from a brief period in the 1980s, when the hostile takeover was viable, CEOs were virtual emperors for most of the last 100+ years. Over the last decade or two, however, shareholder activists have grown in number and power. Unlike the gadflies of old, the new activists—mainly hedge funds—have been all about shareholder return. We have seen repeated cases where hedge fund activism has forced out CEOs (and entire boards), resulted in massive changes in corporate strategy, and even led to companies being broken up.

By embracing stakeholderism, the BRT leaders may hope to restore a measure of freedom.

Indeed, to my mind this is the basic problem with CSR. Suppose Acme's board of directors is considering closing an obsolete plant. The board is advised that closing the plant will cost many long-time workers their job and be devastating for the local community. On the other hand, the board's advisors confirm that closing the existing plant will benefit Acme's shareholders, new employees hired to work at a more modern plant to which the work previously performed at the old plant will be transferred, and the local communities around the modern plant. Assume that the latter groups cannot gain except at the former groups' expense. By what standard should the board make the decision?

Shareholder wealth maximization provides a clear answer: close the plant. Once the directors are allowed to deviate from shareholder wealth maximization, however, they must inevitably turn to indeterminate balancing standards. Such standards deprive directors of the critical ability to determine ex ante whether their behavior comports with the law's demands, raising the transaction costs of corporate governance.

Worse yet, absent the clear standard provided by the shareholder wealth maximization norm, managers and directors will be tempted to allow their personal self-interest to dominate their decision making. If the CEO’s interests favor keeping the plant open, the plant likely will stay open, with the decision being justified by reference to the impact of a closing on the plant's workers and the local community. In contrast, if the CEO’s interests are served by closing the plant, the plant will likely close, with the decision being justified by concern for the firm's shareholders, creditors, and other benefited constituencies.

Some BRT leaders probably would be quite content to see that kind of freedom restored to the C-suite.

In sum, the BRT statement changes nothing. Neither the law nor the governance system in which the BRT’s members must function has changed. Shareholder wealth maximization remains the law. When push comes to shove, corporate executives are unlikely to put stakeholder interests ahead of those of shareholders. And anyone who says otherwise is, to again quote Leo Strine, pretending.

Continue reading "Remarks on Corporate Purpose for AALS 2020 Panel on Rising Tensions Among Corporate Stakeholders" »

Posted at 12:00 PM in Corporate Social Responsibility, Dept of Self-Promotion | | Comments (0)

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12/12/2019

We got a lovely compliment from Father Bill Dailey

Posted at 06:11 PM in Dept of Self-Promotion | | Comments (0)

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10/24/2019

Yours truly cited re validity of disgorgement as relief in cases brought by the SEC

In SEC v. Westport Capital Markets LLC., 2019 WL 4857337 (D. Conn. Sept. 30, 2019), THE SEC "accused Westport Capital Markets, LLC, and its owner Christopher E. McClure of violating the Investment Advisers Act of 1940. Westport and McClure have moved to dismiss the SEC complaint to the extent that it seeks a disgorgement remedy."

The Court declined to decide the motion at present, explaining that:

Deferring decision on whether the Court may enter a disgorgement remedy is appropriate in view of uncertainty about the ... extent the SEC may seek disgorgement for strictly victim restitutionary purposes and whether disgorgement for victim restitutionary purposes may retain an equitable character that distinguishes it from disgorgement for deterrent penalty purposes. 

A further reason to forbear ruling for now on the defendants' motion is the likelihood that precedent on whether the SEC may continue to seek a disgorgement remedy may change or be clarified in the coming months. ...

Now pending before the U.S Supreme Court is a certiorari petition on the issue of “[w]hether the Securities and Exchange Commission may seek and obtain disgorgement from a court as ‘equitable relief’ for a securities law violation even though this Court has determined that such disgorgement is a penalty.” Liu v. SEC, No. 18-1501 (petition for writ of certiorari filed on May 31, 2019); see also Stephen Bainbridge, Kokesh Footnote 3 Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 WASH. U. J. L. & POL'Y 17 (2018); Daniel B. Listwa & Charles Seidell, Note, Penalties in Equity: Disgorgement After Kokesh v. SEC, 35 Yale J. Reg. 667 (2018).

Granted, it's not much of a cite. But it counts. Now I need to get the Supreme Court to cite the article.

On that score, I was pleased to see that counsel for petitioners in the Liu case cited my article in their brief:

The SEC first successfully obtained disgorgement in SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77 (S.D.N.Y. 1970), aff’d in part, rev’d and remanded in part on other grounds, 446 F.2d 1301 (2d Cir. 1971). See Stephen M. Bainbridge, Kokesh Footnote Three Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 Wash. U. J.L. & Pol’y 17, 20- 21 (2018). The Second Circuit affirmed the award, adding that “the SEC may seek other than injunctive relief in order to effectuate the purposes of the Act.” SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir. 1971). Even there, however, the court noted that such equitable relief must be “remedial” and thus cannot be “a penalty assessment.” Id.

It'd have been nice if they had cited the arguments I made on the merits, but so be it.

Posted at 01:10 PM in Dept of Self-Promotion, Insider Trading, Securities Regulation |

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09/20/2019

An announcement for adopters of the Klein, Ramseyer, Bainbridge Business Associations Casebook

Posted at 11:13 AM in Books, Dept of Self-Promotion, Law School |

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09/18/2019

Yours Truly on The Economist's Podcast on Corporate Social Responsibility

Posted at 10:32 AM in Corporate Social Responsibility, Dept of Self-Promotion |

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08/21/2019

Slate's Jordan Weissman takes some shots at the Business Roundtable's statement on corporate purpose and I gave him some ammo

From Slate:

On Monday, the Business Roundtable, a major corporate lobbying group, released its latest “Statement on the Purpose of a Corporation,” a lofty mission statement of sorts for the country’s C-suites that the group updates every so often. For more than 20 years, every version of the document has claimed that companies exist primarily to serve the interests of their investors—which typically means making money by any means necessary, and preferably lots of it. This time, however, the roundtable dropped that language, claiming it “does not accurately describe” how corporations view their role today. The new version states that businesses are responsible to all of their various “stakeholders,” including their workers, suppliers, and local communities. ...

Practically speaking, the roundtable statement doesn’t do much. Tim Cook can tell anyone he wants that Apple has lots of different stakeholders and doesn’t just answer to the whims of its shareholders. But the next time investors decide they want the company to start dropping cash on stock buybacks, they can still pressure him to do it. Likewise, just because a lobbying group got together and decided that the purpose of a corporation is to help humanity, that doesn’t make it so. “They don’t get to do that,” Stephen Bainbridge, a law professor at UCLA, told me. “The law gets to do that. And in corporate law, Delaware is the only law that matters.”

My friend Todd Henderson is quoted too. Go read the whole thing. It's quite good, even if I disagree with the policy recommendation.

Posted at 08:11 AM in Corporate Social Responsibility, Dept of Self-Promotion |

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08/19/2019

Kindly help popularize the Bainbridge Hypothetical

Can we please popularize the "Bainbridge Hypothetical"? Anyway, here is an excellent analysis of the problem under Australian law:

At the heart of the Bainbridge Hypothetical is a simple question - by what standard should company directors make their decisions?

Devised by Stephen Bainbridge, a law professor from UCLA*,  his thought experiment asks what the ends of corporate governance should be.    This post revisits the question from the perspective of an Australian director (changes to the original are in bold and are mine):

Acme's Limited board of directors is considering closing an obsolete plant. The board is advised that closing the plant will cost many long-time workers their job and be devastating for the local community. On the other hand, the board's advisors confirm that closing the existing plant will benefit Acme's shareholders through a planned share buy back, new employees hired to work at a more modern plant to which the work previously performed at the old plant will be transferred, and the local communities around the modern plant. 

 Assume that:

  • Acme Limited is an Australian Public Company

  • The long- time workers are research scientists from leading universities;

  • obsolete means sustainably profitable but less profitable than the new plant; and

  • the latter groups cannot gain except at the former groups expense.

 By what standard should the board make the decision in Australia. 

In response to his original hypothetical, the Professor says:

“Shareholder wealth maximization provides a clear answer -- close the plant.

And, from what I can gather from recent comments from the Chief Justice of the Delaware Supreme Court, there's little doubt the Professor is right - in Delaware.

But, corporations being creatures of statute, what passes for the ends of governance in one place are out of place in another.  Put simply, corporations aren't corporations.  Outside of Delaware their nature and purpose reflect the varieties of the world's legislatures.

In Australia, we have an entity statute which makes the shareholder versus stakeholder debate, implicit in the Professor's answer, a false dilemma.  

Posted at 12:43 PM in Corporate Social Responsibility, Dept of Self-Promotion |

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My Tweet to the Business Roundtable Linking My NY Times oped on the importance of the shareholder wealth maximization norm

Posted at 12:34 PM in Corporate Social Responsibility, Dept of Self-Promotion |

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In response to the Business Roundtable Statement on Corporate Purpose, Some Law Review Articles by Yours Truly that are Pertinent

Director Primacy: The Means and Ends of Corporate Governance (February 2002). Available at SSRN: https://ssrn.com/abstract=300860

Any model of corporate governance must answer two basic sets of questions: (1) Who decides? In other words, when push comes to shove, who has ultimate control? (2) Whose interests prevail? When the ultimate decisionmaker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail?

On the means question, prior scholarship has almost uniformly favored either shareholder primacy or managerialism. This article argues that control - the power and right to exercise decisionmaking fiat - is vested neither in the shareholders nor the managers, but in the board of directors. According to this "director primacy" model, the corporation is a vehicle by which the board of directors hires various factors of production. The board of directors thus is not a mere agent of the shareholders, but rather is a sui generis body - a sort of Platonic guardian - serving as the nexus of the various contracts making up the corporation. As a positive theory of corporate governance, director primacy thus claims that fiat - centralized decisionmaking - is the essential attribute of efficient corporate governance. As a normative theory of corporate governance, director primacy claims that resolving the resulting tension between authority and accountability is the central problem of corporate law.

On the ends question, prior scholarship has tended to favor either shareholder primacy or various forms of stakeholderism. Again, director primacy rejects both approaches. Although shareholder primacy and the shareholder wealth maximization norm are often conflated, one can have the latter without necessarily endorsing the former. Hence, this article argues that director decisionmaking primacy can be reconciled with a contractual obligation on the board's part to maximize the value of the shareholders' residual claim.

In Defense of the Shareholder Wealth Maximization Norm. Washington & Lee Law Review, Vol. 50, 1993. Available at SSRN: https://ssrn.com/abstract=303780

This essay, "In Defense of the Shareholder Wealth Maximization Norm, appeared in the Symposium on New Directions in Corporate Law published in volume 50 of the Washington & Lee Law Review. This essay was written as a reply to an article in the same symposium by Professor Ronald M. Green - "Shareholders as Stakeholders: Changing Metaphors of Corporate Governance," 50 Wash. & Lee. L. Rev. 1409 (1993) - in which Professor Green criticized the dominant view of corporate governance, according to which directors have a fiduciary duty to maximize shareholder wealth. In sharp contrast, this essay argues that the principle of shareholder wealth maximization is both a valid positive account of corporate law and also a legitimate normative proposition.

The essay is grounded in a contractarian approach to corporate governance. The essay begins by observing that in the nexus of contracts theory the concept of ownership goes out the window, along with its associated economic and ethical baggage. Consequently, the traditional justification for shareholder wealth maximization - i.e., that shareholders own the corporation - is unavailing. There is a considerable difference between showing that the traditional private property model is inadequate, however, and showing that we should adopt a new decisionmaking norm to which corporate officers and directors must conform their behavior.

The essay then identifies and critiques the two principal normative arguments running through Professor Green's article. First, Green treats the limited liability rule as a privilege conferred by society, in return for which society can demand socially responsible corporate behavior. My essay points out that this is little more than a revival of the long-dead concession theory of corporate governance. Second, Green contends that limited liability is a mechanism through which shareholders harm nonshareholders by externalizing certain costs onto them. Although this is a more substantial argument, my essay contends that it is not persuasive. Although limited liability does permit such externalities, Green's proposed solution - i.e., allowing/requiring directors to consider the effects of their decisions on nonshareholder constituencies of the corporation - is highly flawed. Such a multi-constituency fiduciary duty would be unworkable, at best, and would significantly increase the agency costs inherent in the separation of ownership and control.

The Bishops and the Corporate Stakeholder Debate (April 2002). Villanova Journal of Law and Investment Management. Available at SSRN: https://ssrn.com/abstract=308604

Prepared for a conference on faith-based investing practices, this essay critiques Catholic social teaching on corporate social responsibility. Specifically, the essay focuses on one of the policy recommendations made by the U.S. Bishops in their pastoral letter on economic justice, Economic Justice for All: Pastoral Letter on Catholic Social Teaching and the U.S. Economy. In that letter, the Bishops addressed the so-called stakeholder debate; i.e., whether decisionmaking by directors of public corporations should take into account the interests of corporate constituencies other than shareholders. This essay focuses on the Bishops' position as matter of public policy rather than as a matter of theology. The essay evaluates three ways in which the Bishops' position might be translated into public policy: (1) directors could be given nonreviewable discretion to make trade-offs between shareholder and stakeholder interests; (2) directors could be given reviewable discretion to make such trade-offs; or (3) directors could be required to make such trade-offs subject to judicial (or regulatory) oversight. None of these approaches is an improvement on current law; to the contrary, all are worse. The first approach would be toothless, the second would increase agency costs, and the third would either prove unworkable or pose an unwarranted threat to economic liberty (or both).

The Shared Interests of Managers and Labor in Corporate Governance: A Comment on Strine (May 10, 2007). Available at SSRN: https://ssrn.com/abstract=985683

In his essay, Toward Common Sense and Common Ground?, Delaware Vice Chancellor Leo Strine seeks to identify common concerns of corporate management, labor, and shareholders. In so doing, Strine endorses a vision of the corporation as "a social institution that, albeit having the ultimate goal of producing profits for stockholders, also durably serves and exemplifies other societal values." Accordingly, he directs our attention to the prospects of creating "a corporate governance structure that better fosters [the corporation's stakeholders'] mutual interest in sustainable economic growth."

There is much that is admirable in Strine's analysis of what ails corporate governance and his proposals for reform, as well as much that is debatable. In this brief comment, I identify three aspects of Strine's analysis that strike me as underdeveloped. First, what do we mean when we call the corporation "a social institution"? Second, do managers and laborers really have common interests threatened by shareholders? Finally, even if Strine's search for common ground is a worthwhile project, is corporate law and governance the appropriate arena in which to find it? Taken together, these issues raise serious questions about the viability of Strine's project.

Corporate Social Responsibility in the Night Watchman State: A Comment on Strine & Walker (September 9, 2014). Available at SSRN: https://ssrn.com/abstract=2494003

Delaware Supreme Court Chief Justice Leo Strine and Nicholas Walter have recently published an article arguing that the U.S. Supreme Court’s decision in Citizens United v. FEC undermines a school of thought they call “conservative corporate law theory.” They argue that conservative corporate law theory justifies shareholder primacy on grounds that government regulation is a superior constraint on the externalities caused by corporate conduct than social responsibility norms. Because Citizens United purportedly has unleashed a torrent of corporate political campaign contributions intended to undermine regulations, they argue that the decision undermines the viability of conservative corporate law theory. As a result, they contend, Citizens United “logically supports the proposition that a corporation’s governing board must be free to think like any other citizen and put a value on things like the quality of the environment, the elimination of poverty, the alleviation of suffering among the ill, and other values that animate actual human beings.”

This essay argues that Strine and Walker’s analysis is flawed in three major respects. First, “conservative corporate law theory” is a misnomer. They apply the term to such a wide range of thinkers as to make it virtually meaningless. More important, scholars who range across the political spectrum embrace shareholder primacy. Second, Strine and Walker likely overstate the extent to which Citizens United will result in significant erosion of the regulatory environment that constrains corporate conduct. Finally, the role of government regulation in controlling corporate conduct is just one of many arguments in favor of shareholder primacy. Many of those arguments would be valid even in a night watchman state in which corporate conduct is subject only to the constraints of property rights, contracts, and tort law. As such, even if Strine and Walker were right about the effect of Citizens United on the regulatory state, conservative corporate law theory would continue to favor shareholder primacy over corporate social responsibility.

Corporate Purpose in a Populist Era. Available at SSRN: https://ssrn.com/abstract=3237107

In the wake of the 2016 US Presidential election and similar developments parts of Europe, commentators widely acknowledged the rise of populist movements on both the right and left of the political spectrum that both were deeply suspicious of big business. This development potentially has important implications for the law and practice of corporate purpose.

Left of center corporate social responsibility campaigners have long advocated the use of “boycotts, shareholder activism, negative publicity, and so on” to pressure corporate managers to act in ways those campaigners deem socially responsible. Right of center populists could use the same tactics to induce corporate directors to make decisions they favor. The question thus is whether they are likely to do so based on their historical track record.

Assuming for the sake of argument that right-of-center populists begin focusing on corporate purpose, the question arises whether modifying the shareholder wealth maximization norms so as to give managers more discretion to take the social effects of their decisions into account would lead to outcomes populists would view as desirable. Populists historically have viewed corporate directors and managers as elites opposed to the best interests of the people. Today, right of center populists find themselves increasingly at odds with an emergent class of social justice warrior CEOs, whose views on a variety of critical issues are increasingly closer to those of blue state elites than those of red state populists.

Posted at 12:28 PM in Corporate Social Responsibility, Dept of Self-Promotion |

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08/15/2019

A lengthy Twitter thread on whether casebooks count as scholarship and whether casebooks should be more like treatises

Posted at 05:17 PM in Books, Dept of Self-Promotion |

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07/23/2019

Yours truly cited in a post-Kokesh case

In U.S. v. Bank, 378 F. Supp. 3d 451 (E.D. Va. 2019), the court explained that:

This matter is before the Court on Defendant Daryl G. Bank's (“Defendant” or “Bank”) Motion to Dismiss for Double Jeopardy Violation. Def.'s Mot., ECF No. 139. Defendant moves to dismiss the pending indictment against him in light of the United States Supreme Court's decision in Kokesh v. SEC, ––– U.S. ––––, 137 S. Ct. 1635, 198 L.Ed.2d 86 (2017).

The indictment charges various violations of the securities laws. The court further explained that:

Defendant claims that the 2017 Supreme Court decision in Kokesh, which declared SEC disgorgement a penalty, bars pursuit of the instant criminal action under the Double Jeopardy Clause of the Fifth Amendment because Defendant has already been punished for some of the activity with which he is charged. The Government replied on December 11, 2018, arguing ... that he cannot claim Double Jeopardy because he only received a civil punishment [in the prior SEC action].

In a footnote to the section of the opinion addressing that argument, the court observed that:

Kokesh has sparked a debate about whether district courts have the authority at all to impose disgorgement because the Supreme Court appeared to question such authority. See Kokesh, 137 S. Ct. at 1642 n.3 (stating that the court offered “[n]o opinion on whether courts possess authority to order disgorgement in SEC proceedings”); Donna M. Nagy, The Statutory Authority for Court-Ordered Disgorgement in SEC Enforcement Actions, 71 S.M.U. L. Rev. 896, 898 (2018) (explaining how, at oral argument for Kokesh, the Justices questioned the authority to order disgorgement and invited challenges to it by disclaiming, in a footnote of the opinion, that it was not deciding the issue). Those arguing there is no authority for disgorgement suggest that, now that disgorgement has been declared a penalty, it can no longer be within a district court's equitable authority because a court cannot impose penalties when acting in equity. See, e.g., Stephen M. Bainbridge, Kokesh Footnote Three Notwithstanding: The Future of the Disgorgement Penalty in SEC Cases, 56 Wash. U. J.L. & Pol'y 17, 21-22 (2018). Those arguing that there is authority posit that just because disgorgement is a penalty for one purpose does not mean it is a penalty for all purposes, and that Congress has expressly recognized a court's power to order disgorgement. See, e.g., Nagy, supra, at 901-903. In March of 2019, a bill was introduced in the Senate that would resolve this debate by amending 15 U.S.C. § 78u(d) to expressly grant district courts the authority to order disgorgement. Securities Fraud Enforcement and Investor Compensation Act of 2019, S.799, 116th Cong. (2019).

That said, a district court's authority to order disgorgement is not at issue here. Accordingly, the Court assumes, for the purposes of this motion only, that district courts necessarily have the authority to order disgorgement under the equitable authority granted to them by one of the statutes discussed above. See 15 U.S.C. §§ 77t(b), 77v(a), 78aa, 78u(d) (1).

 

Posted at 01:29 PM in Dept of Self-Promotion, Securities Regulation |

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Yours truly cited in a case involving right of refusal transfer restrictions in close corporations

The Westlaw headnote in Minority Dewey v. Bechthold, 18-CV-1739-JPS, 2019 WL 2193865 (E.D. Wis. May 21, 2019), explains:

Background: Minority shareholders of several closely held corporations and various related trusts and beneficiaries brought action against majority shareholders and corporations, alleging fraud and violations of Wisconsin state law in connection with their rights as shareholders, and seeking declaratory judgment that creation of transfer restriction on shares gave majority shareholders the ability to manipulate the books to force minority stockholders to sell their shares to the controllers at an artificially-depressed price, which rendered right-of-refusal provision in transfer restriction unreasonable and unenforceable as a matter of law. Defendants moved to dismiss for failure to state a claim. ...

Holdings: The District Court, J.P. Stadtmueller, J., held that: ... 

2 transfer restriction was not invalid, unreasonable, or unenforceable;

In support of that holding, the Court explained that:

Wis. Stat. § 180.0627(4)(a) permits right-of-refusal transfer restrictions that “obligate the shareholder...first to offer the corporation or other persons, whether separately, consecutively or simultaneously, an opportunity to acquire the restricted shares.” Most courts in Wisconsin (and throughout the country) uphold these restrictions if they are “reasonable” and if the party against whom the restriction is asserted had notice of the restriction. Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, 161 N.Y.S.2d 418, 141 N.E.2d 812, 816 (N.Y. Ct. App. 1957); Bruns v. Rennebohm Drug Stores, 151 Wis.2d 88, 442 N.W.2d 591, 596 (Wis. Ct. App. 1989) (acknowledging that “close corporations have a special need to control the number and character of shareholders”); Casper v. Kalt-Zimmers Mfg. Co., 159 Wis. 517, 149 N.W. 754, 756 (Wis. 1914) (noting that right-of-refusal restrictions reflect sound business policy).2 However, “if the by-law under consideration were to be construed as rendering the sale of the stock impossible to anyone except to the corporation at whatever price it wished to pay, we would, of course, strike it down as illegal.” Allen, 161 N.Y.S.2d 418, 141 N.E.2d at 816. Although Wisconsin courts routinely uphold these types of provisions, some courts have held that rights-of-refusal should be narrowly construed. Frandsen v. Jensen-Sundquist Agency, Inc., 802 F.2d 941, 945–46 (7th Cir. 1986) (applying Wisconsin law and holding that a right-of-refusal is not triggered by a merger). Finally, it is worth noting that there is no legally mandated option price. Rather, the option price is set at the discretion of the corporation. See Nichols Constr. Corp. v. St. Clair, 708 F. Supp. 768, 771 (M.D. La. 1989), aff'd mem., 898 F.2d 150 (5th Cir. 1990) (holding that “the mere failure to pay ‘fair value’ for stock under a stock redemption agreement” is not “fraud or breach of fiduciary duty.”); F.B.I. Farms, Inc. v. Moore, 798 N.E.2d 440, 448 (Ind. 2003) (“to the extent that restriction devalues the shares in the hands of any individual shareholder by reason of lack of transferability, it is the result of the bargain they struck”); see also Stephen M. Bainbridge, Corporate Law, § 14.2 (3d ed. 2015) (explaining the aforesaid and noting that, where a right-of-refusal provision is in place, even option prices set at fair market value will be dramatically discounted by potential third party purchasers to account for the bargain's low likelihood of success).

Posted at 01:20 PM in Corporate Law, Dept of Self-Promotion |

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